Deck 10: Externalities and Property Rights

Question 1

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. The external benefit of each dose is:

A)$70
B)$50
C)$30
D)$20

Answer 1

$70

Question 2

A benefit of an activity received by people not participating in the activity is called a(n):

A)winner's curse.
B)positive externality.
C)external cost.
D)negative externality.

Answer 2

positive externality.

Question 3

If coal mining produces a negative externality because it leads to environmental damage, then, at the market equilibrium, the:

A)price of coal will be higher than the socially optimal price.
B)quantity of coal produced will be less than the socially optimal quantity.
C)quantity of coal produced will be greater than the socially optimal quantity.
D)supply curve will lie to the left of the regulated supply curve.

Answer 3

quantity of coal produced will be greater than the socially optimal quantity.

Question 4

If either the production or consumption of a good generates an external benefit, then the:

A)social demand curve will lie to the right of the private demand curve.
B)social demand curve will lie to the left of the private demand curve.
C)social marginal cost curve will lie to the left of the private marginal cost curve.
D)social marginal cost of the good will equal zero.

Question 5

If the production of a good generates a positive externality, then:

A)production of the good is harmful.
B)there will be deadweight loss at the market equilibrium quantity.
C)total economic surplus will be maximized at the market equilibrium quantity.
D)the government should tax producers of the good.

Question 6

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. At the private market equilibrium, the price of each dose is:

A)$50.
B)$60.
C)$70.
D)$80.

Question 7

Which of the following is NOT an example of an activity with external benefits?

A)Eating a sandwich in the dining hall
B)Planting flowers in your front yard
C)Installing smoke alarms in your house
D)Having your car's faulty exhaust system repaired

Question 8

If the market equilibrium quantity is less than the socially optimal quantity, one can infer that:

A)the private supply curve for the activity is below the socially optimal supply curve.
B)the private demand curve for the activity is above the socially optimal demand.
C)there is a positive externality associated with this good.
D)there is a negative externality associated with this good.

Question 9

Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates ______ externality, and burning tires generates ______ externality.

A)a positive; a negative
B)a negative; a positive
C)a positive, no
D)no; a negative

Question 10

If the equilibrium quantity is equal to the socially optimal quantity, one can infer that:

A)the supply curve for the activity is below the socially optimal supply curve.
B)there is no externality associated with this good.
C)there is a positive externality associated with this good.
D)there is a negative externality associated with this good.

Question 11

An external benefit implies that private markets will provide ______ than the socially optimal quantity, and an external cost implies that private markets will provide ______ than the socially optimal quantity.

A)more; more
B)less; less
C)more; less
D)less; more

Question 12

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. The private market equilibrium quantity is ______ doses per day.

A)50
B)75
C)100
D)125

Question 13

A cost of an activity that falls on people not engaged in the activity is called a(n):

A)external benefit.
B)prisoner's dilemma.
C)negative externality.
D)positive externality.

Question 14

In the case of either a positive or negative externality, a good's market price will:

A)be too low.
B)be too high.
C)not fully reflect a good's social marginal cost or social marginal benefit.
D)not equate the quantity supplied by sellers with the quantity demanded by buyers.

Question 15

Which of the following is an example of an activity with an external cost?

A)Raising honeybees where neighbors on all sides grow apples.
B)Keeping your front yard clean.
C)Speeding on the interstate.
D)Having to buy batteries for the new remote that came with a TV.

Question 16

If the consumption of good generates an external benefit, then the market equilibrium quantity:

A)will be socially optimal.
B)will be less than the socially optimal quantity.
C)will be greater than the socially optimal quantity.
D)could be either less than or greater than the socially optimal quantity.

Question 17

If either the production or consumption of a good generates an external cost, then the:

A)social demand curve will lie to the right of the private demand curve.
B)social marginal cost curve will lie to the right of the private marginal cost curve.
C)social marginal cost curve will lie to the left of the private marginal cost curve.
D)social demand for the good will equal zero.

Question 18

If the production of a good generates a negative externality, then at the market equilibrium quantity, the marginal cost to society of another unit of the good will be:

A)less than the marginal benefit of another unit.
B)greater than the marginal benefit of another unit.
C)equal to the marginal benefit of another unit.
D)negative due to the external cost.

Question 19

If the market equilibrium quantity is greater than the socially optimal quantity, one can infer that:

A)the private supply curve for the activity is to the left of the socially optimal supply curve.
B)the private demand curve for the activity is below the socially optimal demand.
C)there is a positive externality associated with this good.
D)there is a negative externality associated with this good.

Question 20

The existence of a negative externality will result in:

A)a less than optimal level of production.
B)a greater than optimal level of production.
C)prices that are artificially high.
D)elimination of deadweight loss.

Question 21

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar; nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. Is it socially optimal for the cigar smoker to smoke?

A)No, because the majority of people in the room dislike the smell of cigar smoke.
B)No, because the value to the cigar smoker of smoking is less than the total value to the other people in the room of clean air.
C)Yes, because the value to the cigar smoker of smoking is greater than the total value to the other people in the room of clean air.
D)Yes, because the value to the cigar smoker of smoking is greater than 50 cents.

Question 22

The Coase theorem implies that the initial allocation of property rights:

A)determines all aspects of the final outcome of the negotiated agreement.
B)does not determine which person will be entitled to engage in the externality generating activity, but does determine which person will receive compensation.
C)determines which person will be entitled to engage in the externality generating activity, but does not affect which person will receive compensation.
D)must be assigned to the person with the greatest costs.

Question 23

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar; nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If the rules governing the room instead stated that smoking is allowed unless everyone in the room agrees to prohibit it, then:

A)the non-smoking occupants will pay the cigar smoker to not smoke.
B)the cigar smoker will smoke and not have to pay the other occupants for the external cost.
C)the cigar smoker will smoke, and will pay each other occupant 50 cents.
D)the parties may or may not be able to reach a negotiated agreement depending on the bargaining strength of each.

Question 24

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. $$\begin{array} { | l | c | c | } \hline & \begin{array} { c } \text { Quick Burger } \\\text { Operates a } \\\text { Drive-Through } \\\text { Window }\end{array} & \begin{array} { c } \text { Quick Burger } \\\text { Does Not Operate } \\\text { Drive-Through } \\\text { Window }\end{array} \\\hline \text { Quick Burger } & \$ 24,000 & \$ 15,000 \\\hline \text { The Sunshine Café } & \$ 11,000 & \$ 23,000 \\\hline\end{array}$$ Suppose Quick Burger has the legal right to operate a drive-through window, and Quick Burger and the Sunshine Café can negotiate with each other at no cost. Which of the following arrangements would lead to the socially optimal outcome?

A)Quick Burger pays The Sunshine Café $12,500 per month to operate the drive-through window.
B)Quick Burger pays The Sunshine Café $10,500 per month to operate the drive-through window.
C)The Sunshine Café pays Quick Burger $12,500 per month not to operate the drive-through window.
D)The Sunshine Café pays Quick Burger $10,500 per month not to operate the drive-though window.

Question 25

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. $$\begin{array} { | l | c | c | } \hline & \begin{array} { c } \text { Quick Burger } \\\text { Operates a } \\\text { Drive-Through } \\\text { Window }\end{array} & \begin{array} { c } \text { Quick Burger } \\\text { Does Not Operate } \\\text { Drive-Through } \\\text { Window }\end{array} \\\hline \text { Quick Burger } & \$ 24,000 & \$ 15,000 \\\hline \text { The Sunshine Café } & \$ 11,000 & \$ 23,000 \\\hline\end{array}$$ If Quick Burger has the legal right to operate a drive-through window, then the Sunshine Café would have to pay Quick Burger at least ______ per month to NOT operate a drive-through window.

A)$9,000
B)$11,000
C)$15,000
D)$24,000

Question 26

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. The private demand for the vaccine is given by ______, and social demand for the vaccine is given by ______.

A)D1; MC
B)D2; MC
C)D1; D2
D)D2; D1

Question 27

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. $$\begin{array} { | l | c | c | } \hline & \begin{array} { c } \text { Quick Burger } \\\text { Operates a } \\\text { Drive-Through } \\\text { Window }\end{array} & \begin{array} { c } \text { Quick Burger } \\\text { Does Not Operate } \\\text { Drive-Through } \\\text { Window }\end{array} \\\hline \text { Quick Burger } & \$ 24,000 & \$ 15,000 \\\hline \text { The Sunshine Café } & \$ 11,000 & \$ 23,000 \\\hline\end{array}$$ If Quick Burger has the legal right to operate a drive-through, and Quick Burger and The Sunshine Café CANNOT negotiate with each other, then will Quick Burger operate a drive-though window?

A)No, because it is not socially efficient to operate a drive-through.
B)Yes, because Quick Burger's payoff is higher when it operates a drive-through.
C)No, because it would lower the payoff for The Sunshine Café.
D)It cannot be determined.

Question 28

Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. Which, if any, of the following ways of splitting the total monthly rent would induce them to live together?

A)Kate pays $150 per month and Ali pays $450 per month
B)Kate pays $250 per month and Ali pays $350 per month
C)Kate pays $375 per month and Ali pays $125 per month
D)There is no way to split the rent to induce them to live together

Question 29

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. The government could increase total economic surplus by:

A)taxing production of the vaccine.
B)encouraging people to pay each other to get the vaccine.
C)subsidizing production of the vaccine.
D)providing 250 doses of the vaccine for free.

Question 30

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar; nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If the cigar smoker paid each other occupant fifty cents for the right to smoke, the cigar smoker would be ______ and the other occupants would be _______.

A)better off; worse off
B)better off; just as well off as before the payment
C)better off; better off
D)worse off; just as well off as before the payment

Question 31

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. The socially optimal quantity of the vaccine is ______ doses per day.

A)50
B)75
C)100
D)125

Question 32

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar; nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If all ten people can negotiate with each other at no cost, then the Coase theorem predicts that if the cigar smoker has the right to determine whether smoking is allowed, then there ______ be smoking, and if the other nine people in the room have the right to determine whether smoking is allowed, then there ______ be smoking.

A)will; will
B)will; will not
C)will not; will not
D)will not; will

Question 33

Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. If Kate and Ali decide to live together, is it socially optimal for Ali play her music in the apartment?

A)Yes, because the benefit to Ali of listening to her music is greater than the cost to Kate.
B)No, because the benefit to Ali of listening to her music is less than the cost to Kate.
C)Yes, because the benefit to Ali of listening to her music is less than the cost to Kate.
D)No, because the benefit to Ali of listening to her music is greater than the cost to Kate.

Question 34

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. $$\begin{array} { | l | c | c | } \hline & \begin{array} { c } \text { Quick Burger } \\\text { Operates a } \\\text { Drive-Through } \\\text { Window }\end{array} & \begin{array} { c } \text { Quick Burger } \\\text { Does Not Operate } \\\text { Drive-Through } \\\text { Window }\end{array} \\\hline \text { Quick Burger } & \$ 24,000 & \$ 15,000 \\\hline \text { The Sunshine Café } & \$ 11,000 & \$ 23,000 \\\hline\end{array}$$ Is it socially optimal for Quick Burger to operate a drive-through window?

A)No, because The Sunshine Café's payoff is lower when Quick Burger operates a drive-through window.
B)No, because total payoffs are higher when Quick Burger does not operate a drive-through window.
C)Yes, because Quick Burger's payoff is higher when Quick Burger operates a drive-though window.
D)Yes, because total payoffs are higher when Quick Burger operates a drive-through window.

Question 35

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. At the private market equilibrium, the deadweight loss is ______ per day.

A)$0
B)$125
C)$250
D)$500

Question 36

The insight that people can always arrive at efficient solutions to the problems caused by externalities if they can negotiate the purchase and sale of the right to perform activities that cause externalities is called the _______.

A)Sherman Act
B)Coase Theorem
C)tragedy of the commons
D)prisoner's dilemma

Question 37

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. $$\begin{array} { | l | c | c | } \hline & \begin{array} { c } \text { Quick Burger } \\\text { Operates a } \\\text { Drive-Through } \\\text { Window }\end{array} & \begin{array} { c } \text { Quick Burger } \\\text { Does Not Operate } \\\text { Drive-Through } \\\text { Window }\end{array} \\\hline \text { Quick Burger } & \$ 24,000 & \$ 15,000 \\\hline \text { The Sunshine Café } & \$ 11,000 & \$ 23,000 \\\hline\end{array}$$ If Quick Burger has the legal right to operate a drive-through window, then the Sunshine Café would be willing to pay Quick Burger as much as ______ per month to NOT operate a drive-through window.

A)$9,000
B)$11,000
C)$12,000
D)$15,000

Question 38

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar; nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. Declaring the card room a non-smoking area with no opportunity to negotiate would:

A)decrease total economic surplus.
B)increase total economic surplus.
C)leave total economic surplus unchanged, but redistribute benefits.
D)efficiently solve the externality problem.

Question 39

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. $$\begin{array} { | l | c | c | } \hline & \begin{array} { c } \text { Quick Burger } \\\text { Operates a } \\\text { Drive-Through } \\\text { Window }\end{array} & \begin{array} { c } \text { Quick Burger } \\\text { Does Not Operate } \\\text { Drive-Through } \\\text { Window }\end{array} \\\hline \text { Quick Burger } & \$ 24,000 & \$ 15,000 \\\hline \text { The Sunshine Café } & \$ 11,000 & \$ 23,000 \\\hline\end{array}$$ If Quick Burger has the legal right to operate a drive-through, and Quick Burger and The Sunshine Café can negotiate with each other at no cost, then will Quick Burger operate a drive-though window?

A)No, because it is not socially efficient to operate a drive-through.
B)Yes, because Quick Burger's payoff is higher when it operates a drive-through.
C)No, because it would lower the payoff for The Sunshine Café.
D)It cannot be determined.

Question 40

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar; nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If all ten people can negotiate with each other at no cost, then which of the following outcomes is consistent with the Coase theorem?

A)The cigar smoker will not be able to smoke because the majority of people in the room dislike the smell of cigar smoke.
B)The cigar smoker will pay each of the other nine people fifty-five cents, and they will agree to allow smoking.
C)The cigar smoker will smoke because the external cost of smoking does not need to be taken into consideration.
D)The nine non-smokers will each pay the cigar smoker fifty cents and the cigar smoker will not smoke.

Question 41

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. $$\begin{array} { | l | c | c | } \hline & \text { With Filter } & \text { Without Filter } \\\hline \text { Gains to Erie } & \$ 200 & \$ 400 \\\hline \text { Fisherman } & \$ 180 & \$ 50 \\\hline \text { Bird Watchers } & \$ 130 & \$ 25 \\\hline\end{array}$$ When Erie Textiles operates with a filter, the total gain (in thousands of dollars) by all three parties is ______.

A)$985
B)$600
C)$510
D)$475

Question 42

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for $800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month. Curly and Moe have both taken an economics course and so are willing to apply the Coase theorem and negotiate. Who will compensate the other?

A)Neither Moe nor Curly has the initial property right, and so neither will compensate the other.
B)Moe must compensate Curly because Moe is the one who is snoring.
C)Curly must compensate Moe because Curly is the one who is bothered by the snoring.
D)Either Moe will compensate Curly or Curly will compensate Moe because the alternative, renting separate apartments, leaves each worse off.

Question 43

The optimal quantity of a negative externality is zero if:

A)it imposes a high enough cost on society.
B)it is costly for people to negotiate with each other.
C)the majority of voters decide to eliminate the externality.
D)the marginal cost of reducing the externality is zero.

Question 44

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for $800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month. The least costly solution to the externality present in this situation is for:

A)Curly to endure Moe's snoring.
B)both to live alone.
C)Moe to eliminate his snoring.
D)Moe to pay Curly for his discomfort.

Question 45

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for $800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month. The actual monthly gain in surplus to Curly and Moe from living together after addressing the snoring problems in the least costly way is:

A)$200.
B)$150.
C)$100.
D)$50.

Question 46

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. $$\begin{array} { | l | c | c | } \hline & \text { With Filter } & \text { Without Filter } \\\hline \text { Gains to Erie } & \$ 200 & \$ 400 \\\hline \text { Fisherman } & \$ 180 & \$ 50 \\\hline \text { Bird Watchers } & \$ 130 & \$ 25 \\\hline\end{array}$$ Suppose that Erie Textiles can only negotiate with one of the affected groups. Will Erie operate with a filter?

A)Yes, if they negotiate with the Bird Watchers, but not if they negotiate with the Fishermen.
B)No, regardless of which group they negotiate with.
C)Yes, if they negotiate with the Fishermen, but not if they negotiate with the Bird Watchers.
D)Yes, regardless of which group they negotiate with.

Question 47

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. $$\begin{array} { | l | c | c | } \hline & \text { With Filter } & \text { Without Filter } \\\hline \text { Gains to Erie } & \$ 200 & \$ 400 \\\hline \text { Fisherman } & \$ 180 & \$ 50 \\\hline \text { Bird Watchers } & \$ 130 & \$ 25 \\\hline\end{array}$$ If all three parties can communicate and negotiate with each other at no cost, will Erie Textiles use a filter?

A)No, because it makes $200 less in profit with the filter.
B)Yes, because the benefit it would receive from being able to advertise that it acts in an environmentally responsible way exceeds the cost of using a filter.
C)No, because use of a filter would result in smaller total economic surplus.
D)Yes, because fishermen and bird watchers are willing to pay enough to Erie Textiles to offset the cost of using a filter.

Question 48

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. $$\begin{array} { | l | c | c | } \hline & \text { With Filter } & \text { Without Filter } \\\hline \text { Gains to Erie } & \$ 200 & \$ 400 \\\hline \text { Fisherman } & \$ 180 & \$ 50 \\\hline \text { Bird Watchers } & \$ 130 & \$ 25 \\\hline\end{array}$$ If Erie Textiles does not install the filter, there will be a net social ______ of ______ (in thousands of dollars).

A)loss; $35
B)gain; $75
C)loss; $110
D)gain; $200

Question 49

If an activity generates a positive externality, the government can increase total economic surplus by ______ the activity, and if an activity generates a negative externality, the government can increase total economic surplus by ______ the activity.

A)taxing; banning
B)subsidizing; banning
C)subsidizing; taxing
D)publicizing; taxing

Question 50

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. $$\begin{array} { | l | c | c | } \hline & \text { With Filter } & \text { Without Filter } \\\hline \text { Gains to Erie } & \$ 200 & \$ 400 \\\hline \text { Fisherman } & \$ 180 & \$ 50 \\\hline \text { Bird Watchers } & \$ 130 & \$ 25 \\\hline\end{array}$$ When Erie Textiles operates without a filter, the total gain (in thousands of dollars) to all three parties is ______.

A)$985
B)$325
C)$510
D)$475

Question 51

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. $$\begin{array} { | l | c | c | } \hline & \text { With Filter } & \text { Without Filter } \\\hline \text { Gains to Erie } & \$ 200 & \$ 400 \\\hline \text { Fisherman } & \$ 180 & \$ 50 \\\hline \text { Bird Watchers } & \$ 130 & \$ 25 \\\hline\end{array}$$ The cost (in thousands of dollars) of the filter to Erie Textiles is ______, and the net benefit (in thousands of dollars) of the filter to the fishermen and bird watchers is _______.

A)$400; $310
B)$310; $200
C)$200; $75
D)$200; $235

Question 52

Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Assuming that the supply of diesel fuel has a positive slope and demand has a negative slope, the quantity of diesel fuel sold after imposition of the regulation will:

A)remain the same.
B)increase.
C)decrease.
D)decrease only if diesel fuel is a normal good.

Question 53

Which one of the following government actions is intended to generate positive externalities?

A)Taxing polluting industries
B)Speed limits on the highways
C)Requiring autos to meet minimum emissions regulations
D)Subsidies for planting trees on hillsides

Question 54

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. $$\begin{array} { | l | c | c | } \hline & \text { With Filter } & \text { Without Filter } \\\hline \text { Gains to Erie } & \$ 200 & \$ 400 \\\hline \text { Fisherman } & \$ 180 & \$ 50 \\\hline \text { Bird Watchers } & \$ 130 & \$ 25 \\\hline\end{array}$$ Suppose you observe that Erie has not added a filter. You could conclude that the Coase Theorem failed to solve the externality problem because:

A)Erie's benefits to operating without a filter are greater than the benefits of a filter to the fishermen and bird watchers.
B)negotiation with many individual fishermen and bird watchers was too costly.
C)Erie has a property right to the river.
D)regulators prevent application of the Coase Theorem when the environment is at stake.

Question 55

From the perspective of an externality, most communities have zoning laws to:

A)control external benefits.
B)control external costs.
C)encourage positive externalities.
D)raise government revenues.

Question 56

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. $$\begin{array} { | l | c | c | } \hline & \text { With Filter } & \text { Without Filter } \\\hline \text { Gains to Erie } & \$ 200 & \$ 400 \\\hline \text { Fisherman } & \$ 180 & \$ 50 \\\hline \text { Bird Watchers } & \$ 130 & \$ 25 \\\hline\end{array}$$ Local fishermen and bird watchers would be willing to compensate Erie Textiles ______ for operating with a filter.

A)up to $310 thousand dollars
B)no more than $235 thousand dollars
C)no more than $75 thousand dollars
D)nothing

Question 57

Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Assuming that the supply of diesel fuel has a positive slope and demand has a negative slope, one can infer that the EPA determined that:

A)the external benefit of using diesel fuel is less than 10 cents.
B)the external cost of using diesel fuel is greater than 10 cents.
C)the external cost of using diesel fuel is less than 10 cents.
D)the external cost of using diesel fuel is equal to 10 cents.

Question 58

Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Suppose that demand for diesel fuel is perfectly inelastic and supply has a positive slope. The effect of the regulation will _______ than if demand were not perfectly inelastic.

A)increase price and quantity by more
B)increase price by less and reduce quantity by more
C)decrease price and quantity by more
D)increase price by more and reduce quantity by less

Question 59

A policy maker has argued for higher taxes on gasoline to reduce the negative externalities associated with driving. This policy will lead to a relatively ______ reduction in driving if demand is ______.

A)small; perfectly elastic
B)large; perfectly inelastic
C)small; relatively inelastic
D)large; relatively inelastic

Question 60

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for $800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month. Curly would be willing to pay _____ per month to eliminate Moe's snoring.

A)exactly $50
B)no more than $100
C)up to $150
D)nothing

Question 61

Since the cost of using more of any resource is ______, viewing any resource's price as zero leads to ______.

A)positive; underutilization
B)negative; overutilization
C)positive; a surplus
D)positive; overutilization

Question 62

Refer to the figure below. If negotiation is impractical, the socially optimal level of production can be achieved by:

A)banning production of paper.
B)compensating those injured by the externality.
C)imposing a tax on paper equal to the external cost.
D)subsidizing paper by the amount of the external benefit.

Question 63

The tragedy of the commons refers to the:

A)overuse of resources that have no price.
B)overuse of resources that have no cost.
C)under production of goods that have external benefits.
D)failure of the Coase theorem when negotiation is costly.

Question 64

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. Picking up the 20^th bag of litter would:

A)be socially efficient.
B)increase total economic surplus.
C)create deadweight loss.
D)be socially efficient, but would not be consistent the actions of self-interested individuals.

Question 65

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. A state initiative requiring towns to spend at least $20 per day on litter removal would be ______ because ______.

A)efficient; reducing litter is socially optimal
B)inefficient; the marginal cost of litter removal would exceed the marginal benefit
C)inefficient; $20 is insufficient to remove all of the litter
D)efficient; it solves the inefficiency created by the negative externality

Question 66

Refer to the figure below. From this graph, you can infer that paper production:

A)generates no externalities at quantities less than 300 tons per day.
B)generates an external cost of $50 per ton per year.
C)generates an external cost of $150 per ton per year.
D)should be prohibited.

Question 67

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. The marginal cost of litter removal ______ due to ______.

A)decreases; gains from specialization
B)increases; the Coase Theorem
C)increases; increasing opportunity costs
D)decreases; diminishing returns to inputs

Question 68

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. According to this graph, the marginal benefit of litter removal is highest when the ______ bag of litter is removed.

A)first
B)10^th
C)15^th
D)30^th

Question 69

Refer to the figure below. The socially optimal quantity of paper is ______ tons per year.

A)0
B)360
C)150
D)300

Question 70

Refer to the figure below. At the market equilibrium quantity, the social marginal cost of the last ton of paper produced is ______ the marginal benefit of the last ton of paper produced.

A)less than or equal to
B)equal to
C)less than
D)greater than

Question 71

The essential cause of the tragedy of the commons is the fact that:

A)marginal costs are increasing.
B)one person's use of a commonly held resource imposes an external cost on others.
C)people do not always specialize according to their comparative advantage.
D)governments may choose not to tax activities that generate negative externalities.

Question 72

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. Suppose the state highway department has picked up 15 bags of litter. Protesters have staged a demonstration demanding that the highway department return to pick up the remaining litter. From an economic efficiency perspective, the protesters have a ______ claim because ______.

A)legitimate; litter generates a negative externality
B)faulty; the additional resources needed to remove more litter could be better used elsewhere
C)faulty; the government is not responsible for taking care of private property
D)legitimate; the government has a responsibility to take action when private market incentives do not yield the socially optimal outcome

Question 73

Refer to the figure below. This graph suggests that the private market provides incentives to:

A)eliminate the externalities generated by paper production.
B)under-produce paper relative to the social optimum.
C)over-produce paper relative to the social optimum.
D)over-price paper relative to the social optimum.

Question 74

Which of the following would be most vulnerable to the tragedy of the commons?

A)Restrooms in a restaurant
B)Timber on public land
C)Cattle on a ranch
D)Apples in Phoebe's apple orchard

Question 75

The essential reason some species of whales have nearly been driven to extinction is that:

A)it is difficult to define and enforce property rights to whales.
B)the demand for whales is extremely high.
C)the price of whales is very low.
D)experienced whalers find it easy to catch whales.

Question 76

Refer to the figure below. In this case, the private market ______ resources efficiently because ______.

A)does not allocate; demand and supply do not cross at the market equilibrium
B)does not allocate; some of the costs of paper production do not fall on producers
C)allocates; firms are motivated to maximize profit
D)allocates; consumers are willing to pay the external cost of production

Question 77

Early settlers in the town of Dry Gulch drilled wells to pump as much water as they wanted from the single aquifer beneath the town. (An aquifer is an underground body of water.) As more people settled in Dry Gulch, the aquifer level fell and new wells had to be drilled deeper at higher cost. The residents of Dry Gulch will overuse water relative to the social optimum because ______.

A)each resident will fail to adequately consider the external cost of his or her own water use
B)water is a scarce resource
C)each resident will fail to adequately consider the external benefit of his or her own water use
D)the marginal cost of water is increasing

Question 78

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. From the graph, one can infer that:

A)the marginal benefit of picking up the 10^th bag of litter exceed the marginal cost.
B)the marginal cost of picking up the 10^th bag of litter exceed the marginal benefit.
C)the marginal benefit of picking up the 20^th bag of litter exceed the marginal cost.
D)the total benefit of having 30 bags removed is zero.

Question 79

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. The socially optimal number of bags of litter removed from the roadside each day is:

A)10.
B)15.
C)20.
D)30.

Question 80

If the marginal cost of reducing pollution is positive, then:

A)pollution should be reduced as much as technically feasible.
B)the marginal benefit of reducing pollution is zero.
C)the optimal amount of pollution is zero.
D)the optimal amount of pollution is greater than zero.